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Diary of an FHA 203k Loan Deal

from Indianapolis, Indiana

posted over 4 years ago

Hello BiggerPockets family!

Well, it's official. After a lengthy process, I have finally put my first personal residence under contract. It is a 4-unit apartment building, which will allow me to utilize FHA 203k financing. If you haven't yet, I highly recommend you check out the article Brandon Turner wrote for BP that details how to "Hack Your Housing," and is what I am currently attempting to do. http://www.biggerpockets.com/renewsblog/2013/11/02...

I will keep this updated as a blog, as to show all details regarding what is happening with my deal. That way others can learn from what I am doing, and hopefully take it upon themselves to do the same. Here is a little bit about the deal:

4-Units--(2) 2BR, (2) 3BR.

Purchase Price: $85,000

Rehab Needed: $85,000

Total Purchase Amount: $170,000

Total Loan Amount: $164,050

ARV: $210,000

ARV Gross Monthly Income (3 Units Rented) = $700*3 ($2,100)

Less 10% Vacancy: $210

TOTAL OPERATING INCOME: $1,890

Taxes: $321.50

Insurance: $200

Maintenance Reserve: $210 (10% of gross monthly income)

Mortgage Insurance: $215

TOTAL OPERATING EXPENSES: $946.50

TOTAL NET OPERATING INCOME: $943.50

Loan Amount: $164,050

Term: 30 year fixed/30 year amortization

Interest Rate: 4.75%

Debt Service: $855.76

NET MONTHLY CASH FLOW: $87.74

So, as the saying goes, the numbers are just that--numbers. Now it's time to go make them a reality. I start making moves on Monday, when I hire my FHA Consultant, which is mandatory to walk you through the 203k process with any rehab exceeding $35,000. I will be back to update when possible. Let me know your thoughts--and a special thanks to all who got me to this point. Moving right along!

Vendor from Cincinnati, Ohio

replied over 4 years ago

Awesome deal looks like you should go ahead and count that free apartment as cash flow. Keep us updated this is exactly what I was planning on doing when I get my first. I've been evolved as a contractor on a few 203ks and talked to a few loan officers, heard its nothing but a pain. Should be worth it though. Hopefully the bank will except my bids when the time comes.

Specialist from Marlton, NJ

Congrats Clay. The FHA 203k is a great program. Some things to think about:

- are you using a bank, correspondent lender or broker?

- all have pluses and minuses- the biggest is control but secondly all that really matters is experience.

The HUD consultant is supposed to be picked by the lender, while you can be involved in the process it ultimately is the job of the lender- reason being is there is no oversight or standardization of the reports they provide or the job they do and you want a lender who has relationships with good consultants. The HUD consultant is as big of a part as you, contractor, etc...so this is really important.

Question- how did you come up with the $85K rehab number if you did not have a consultant out yet? The reason I ask is because if you had a contractor give you that number and they missed FHA minimum property standard requirements you might have some more money to add to that number. Just making sure you are covering your bases! Its always good to get a consultant early and do what is called a "feasibility analysis" to see if the property is "feasible" to do a K within your budget.

Investor from Montesano, WA

from Indianapolis, Indiana

replied over 4 years ago

Day 1:

I spent the day on the phone with my FHA 203k consultant, with him guiding me through the coming steps in the process. I was originally concerned with having to pay for a consultant, but the fee that is charged is dictated by HUD, and will run anywhere from $500 to $1,000 depending on the scale of repairs needed. All said, not bad for someone who will hold your hand through the process. Also, this includes your home inspection fee, which is nice. Most FHA 203k consultants are licensed home inspectors.

My consultant is inspecting the property on Thursday. He stated that it will likely take 2-3 hours due to it being a 4-unit property. He will then give a write-up of his inspection's findings, and what the property will NEED in order to be in compliance with FHA. This will be factored into the total amount needed for rehab, and then we can back into the money that I will have left over for WANTS (kitchen cabinets, flooring, windows, etc.)

My underwriting originally allowed for $100K in renovations. So if my consultant tells me that I will need $20K in NEEDS for the property, that will reduce the WANTS that I can possibly add to the property down to $80K. After I receive this inspection write-up from my consultant, I will proceed to host three different contractor groups in the property, discussing what I want to do, and having them each give a total bid for the work. From there I will choose one and notify my consultant.

Anyone been down this road before? What are you seeing that adds the most value to the property for dollar spent (or even specifically in a 4-plex building.) I'm all ears--and will update with more happenings as they occur.

from Indianapolis, Indiana

replied over 4 years ago

Day 4:

I just heard back from my FHA 203k consultant, who informed me that the property is in "near perfect" working order. He gave me a quick estimate on the phone of what MUST be done in order to comply with FHA (esimated around $5,000, maximum) He is in the process of writing up my official inspection report currently and will give it to me in the next few days. From there, I can go to my contractor(s) and get a final estimate on what those repairs would be. They included:

-Installing a handrail to Unit 2's basement.

-Adding gutters to south end of property

-Getting fireplace flue cleaned in 2 of 4 units

-Installing smoke detectors on both floors of all units

As one could expect, I am very excited about this news. It will help expedite the process immensely and won't hinder the contractors too much, as they won't have to do any extensive or complicated repairs. This means one of two things: 1) decreases my overall loan amount and debt service or 2) splurge a bit more than expected when it comes to rehab work in order to bump rents up further. My original underwriting had allowed for $20K in these expenses, so I have since freed up (roughly) $15K.

I am fielding contractors currently and getting then lined up for showings and bids for the work in coming weeks. I would imagine that my total rehab amount has decreased from an estimated $85K down to about $65-70K just with the news I found out today.

from Indianapolis, Indiana

replied over 4 years ago

I met with my contractor a few days ago. After spending a few hours at the property, we both agreed that we will likely be spending the entire budget of $80,000 for renovation work, if not exceeding it all the way up to $100,000. If you are wondering why the budget is so high for my project, it is due to the enormous of amount of new construction in the area.

That being said, I am spending an enormous amount of money in renovations in order to make my property match the new construction and have the property blend in. It will bring in heightened rents ($800-$900/unit) and will appraise out somewhere around $250K.

I am planning on hearing the official bid from my contractor in the next few days. From there, my FHA 203k consultant will review the bid, and complete the official write-up to submit to my Lender. From there, the Lender will use the total figures to get a total mortgage amount, and then be able to underwrite, and close the loan.

All of this needs to move quickly too--supposed to close one month from today. Wish me luck! I'll be back to update as soon as there is new info. If anyone has any questions about my though process or steps along this process, I would be happy to help in any way I can.

Real Estate Investor from atlanta, Georgia

replied over 4 years ago

Just proves what I have been teaching for years.....203k is a phenomenal loan product and a great way to back-door into investing. I've done 100s of these over the years as a contractor in atlanta. Single best way for an individual to buy & renovate a foreclosure property.....luck!!!

from Queens NY, New York

from Indianapolis, Indiana

replied over 4 years ago

Day 31 Since Accepted Purchase Agreement:

FINALLY have an accepted bid from my contractor. For lack of better description or terminology, the overall scope of work was (very) underestimated at the time. We are pretty much taking the thing down to the studs and making it appear as if brand new construction. The rents that will be generated will still supply a great cash flow in the future, but here is what the numbers will look like in my final loan amount:

Purchase Price: $85K

Renovation: $115K

TOTAL PURCHASE PRICE: $200K

(for those who have been asking me about the numbers behind the project, shoot me a DM and I will give you a copy of the analysis. The total monthly cash flow while I am living in one unit will be roughly -$50/month, but when I move out will be around $800/month, or $200/door.)

EVERYTHING in each of the four 1,500 square foot units will be brand new. However, in order to make it that way, I have elected to paint the total interior of the property myself. I figured I could entice a group of buddies with a couple cases of beer instead of spending $10,000. I also will have to purchase appliances and some other touch-up items, so I am likely looking at another $10,000 or so in cash expenditures that I will be making after all is said and done. Yikes.

It is finally settling in how scary it is to jump $200,000 into debt at age 24. Especially considering the scope of renovation and not wanting to end up upside down after everything is completed. However, I have found throughout this process how much I believe in what I am doing. I trust my analysis and detective work, and am confident that I am pulling the right strings at the right times. Of course there will be bumps along the way--just like any flight from point A to point B. However, it is a matter of making sure you have the right equipment in place, and adjusting to the bumps and bruises along the way. I believe in the process and the team I have around me to do just that.

I will say that there are a few things I wish I would have done differently (already):

1. Have multiple FHA approved contractors give you bids for the same scope of work, preferably BEFORE you get a property under contract. I worked with some contractors who do other work for me, but because they are not licensed, they are unable to perform the work. Therefore, I lost precious time and ended up going with a different contractor, who I trust, but had a different idea towards the project and the numbers reflected that.

2. Have a working relationship with your FHA 203k consultant PRIOR to beginning the process. Explain to him what you are going to do. MAKE SURE that all members of the process are on the same page: lender, broker, contractor, FHA consultant, and YOU. If all members are familiar with the process, and all know what the end goal is, a much more seamless process will ensue.

Tomorrow morning I will submit the project write-up my contractor put together to my Lender, and my consultant will then approve the process with his final write-up. After that, my Lender will order an appraisal, and we will then have 24 days for the bank to do their final underwriting, approval, and be ready to close by September 11, 2014. I will update as soon as I hear more!

from Indianapolis, Indiana

I drove. I wish there was a better answer than that, but I found an area that I like and I knew would increase in value with the repairs I was making, and decided to give it a whirl. So I drove around until I saw a property for sale by owner that was not listed on the MLS. It was a 4-plex so I knew it was interested.

He was asking significantly too much money, and had even taken it off the market out of frustration at times, per his words. However, he ended up accepting about 60% of ask, which gave me a good deal and took his headache off of his hands.

I now have buddies in the area who want to do the same thing I am doing, just cold-calling the owners of similar properties in the area. Two of the five have succeeded and are viewing the properties for a potential purchase as we speak. Only time will tell!

Investor from Houston, Texas

from Indianapolis, Indiana

replied over 4 years ago

I just got my final write-up back from the FHA 203k consultant. There is no real major detail in here or anything to get excited about. This is because you have already agreed to the numbers and scope of work to be completed by your contractor--the consultant is simply checking it and making sure it makes sense.

The biggest part of this report is the "contingency reserve" which is a polite way of saying, "The OOPS Budget." In case your contractor underestimated the total amount it will cost to do the project, the FHA 203k consultant recommends a contingency reserve amount, usually between 10% and 20% (mine was 10%) of the total amount of rehab work to be done.

That brings my total PURCHASE amount now to the following: 85K purchase price, 115K in renovation, and 11.5K in contingency reserve. This means that my total PURCHASE amount, is $211,500, with my total loan amount being that, less a 3.5% down payment of $7,402.50. So my total overall loan will be $204,097.50 at a 4.75% interest rate and 30 year, 30 year amortization terms.

Also, it is worth mentioning that there are certain fees associated with this transaction that are nothing major, but are just pesky. My consultant and contractor estimated 6 months to get the project completely finished. FHA mandates that the consultant come inspect the work being completed on the property every 30 days, and each inspection is to cost me $150. This was also detailed on the report I received from my consultant. Also, there is a one time origination fee for the rehab portion of the loan, for 1.25% of the total rehab work to be done. Therefore, that's another $1,437.50 I will be paying in closing costs.

Currently, my costs associated with this transaction are as follows:

$1,000 earnest money

$700 inspection fee (FHA consultant)

$750 appraisal fee (detailed below...)

**There will be more, such as the origination fee, title policy fee, etc, but this is just the start. Overall, the fees being paid are WELL WORTH IT due to the low down payment amount you can get on a multi-unit property, as well as rolling rehab money into the total loan.

Now, my Lender is in receipt of the report from my consultant, and is ordering an appraisal to be done on the property. The appraiser will come out and appraise the premises on two different levels:

1. The condition the property is currently in (how much is it worth NOW)

2. The condition the property will be in once all of the repairs and updates have been made (how much WILL the property be worth LATER)

I am excited to see these numbers so I can compare how well I bought the property, as well as get an idea for what the market is doing for properties like mine. My property happens to be across the street from one 4-plex, but is mostly surrounded by very newly updated single family homes--half of which are rentals, the other half of which are residents.

Once this appraisal is in, the bank can underwrite the loan, tell me what hoops I need to jump through to make the thing close, and I will be all set for closing on September 11. I feel comfortable saying that it will likely be very close on timing in order to close. So cross your fingers, it is going to be a photo finish!

Investor from Oklahoma City, Oklahoma

Glad to hear the update! I didn't realize you needed so much extra cash other than the down payment. However, could you tell me how you contacted the owner initially to purchase the property? It sounds like the property you found had a FSBO sign, but the properties your friends found didn't. Did they just look up the owner from the county records and give him a call asking if he was looking to sell? I followed your example and started driving around an area I'd like to be in and found a potential property, but it does not have a for sale by owner sign, it just looks old and vacant. Thanks again!

from Indianapolis, Indiana

Well done man! Yes, my property had an FSBO sign on the front of it, and I worked in that way. There are a large amount of complications with it now (which has nothing to do with it being FSBO) which I will get into later.

I told my friends to enter the address into the County's tax records, which will reveal the owner of the property. If the owner of the property is an LLC or LP, I simply type in "[Name of LLC] bizapedia." You would be shocked at the accuracy of this. On that link, you can double check to make sure it is the correct company, as well as who the "registered agent" of the company is. This is usually the person the files for the LLC. It is often times the owner, a partner, or the attorney of the entity.

Then, you can hop into Googling their name, whitepages.com, etc, in order to get contact information. Again, if you have never been on an Internet safari trying to find an individual's contact information, you would be stunned at how easy it is to find most of the time. And if all else fails, get out a blank piece of paper, and write the owner a letter, shove it in his mailbox, and wait. If you really like the house, make this a bi-weekly or monthly thing.

You're doing all the right things...DM me if you want some one-on-one help and I will see if I can't point you in the right direction.

from Indianapolis, Indiana

replied over 4 years ago

Day 39 Since Accepted Purchase Agreement, 16 days until Closing:

Here is the update:

My Lender called me on Friday, 8/22. He expressed to me that given the amount of time it took my contractor to get the official bid in, coupled with the time it took to get the FHA consultant to get the official write-up completed, he was concerned that we would be unable to close on the loan on our scheduled date of 9/11. So, my broker and I got together and sent over a request of extension for the closing date. The seller returned to us with "No, and I no longer want to sell the property. If it goes beyond the anticipated closing date, I will not extend, and I won't be selling."

Wow.

So, now we are making a mad push for a closing. For anyone who has ever worked with a traditional bank (especially in FHA systems) it IS a complete headache. Prepare to hand over every credit statement, bank statement, pay stub, leases, rental income, and EVERYTHING in between, just so the bank will give you a thumbs up. So I am in the middle of that process. I will be signing paperwork today so that the Lender can order the appraisal. Needless to say, I am not confident that the loan will close on 9/11. So I am taking matters into my own hands.

I am talking with family members about taking out HELOCs and other lines of credit out in their name/against their property, in order to front me the $85,000 needed to purchase this property. That way, I can show up to the closing table with an $85,000 check, and the seller will have to follow through with this contract. I will have to pay a little interest, but it is well worth it considering I don't want to lose this deal because of the following:

1. I already have $1,705 sunk into this project.

2. I will spend another $800 or so on an appraisal

3. IT IS A REALLY GOOD DEAL

So once I have closed on the property in CASH, I can then refinance INTO an FHA 203k loan, which will allow me to pay off my private lender, as well as take on the renovation debt that I originally wanted to incur. The only difference is that I will no longer be on the bank or a seller's timeline.

Not sure which way I will go at this point, but I am making sure to cover all my bases so that come September 11, I will walk away from the closing table with a property and a really sweet deal. Hopefully some of you all trying to do the same thing can learn from this in order to save you some time and headaches along the way!

from Indianapolis, Indiana

replied over 4 years ago

14 days until closing:

I was told by my lending bank today that they needed somewhere in the ballpark of 2.5 million obscure documents in order to underwrite the loan. I expected as much, which is why I am scrambling around getting everything together for them. However, the more I consider the timeline and where we are at in the process, the more I WANT to close on the property in cash.

I have been told by several lenders that I will then be able to refinance into an FHA 203k loan so long as I have a notarized Promissory Note that I will be cashing-out. They were very strict to mention that they will NOT allow you to take cash out for personal reasons, i.e, the down payment on a rental, etc.

However, once I secure a private lender, I am no longer under the time crunch required by the bank, and it frees me up in many different ways. I have still ordered the appraisal, which I will receive one week from today, however, that only leaves the bank 5 business days to underwrite, approve, and close. It's not going to happen folks.

This has turned into a much larger hassle than most FHA 203k transactions, but if there is one thing I can recommend, again, it's this--FIND EXPERTS. People who know the process in and out and beyond. Find quick underwriters. And find sellers who actually want to, you know, sell their property. I am quickly becoming much more well0versed on this subject than I ever imagined, and I would gladly help anyone else who is looking to do the same thing I am currently doing. Because despite the headache, you simply can't beat borrowing 96.5% of purchase AND renovations. You just can't.

Send your well-wishes and good vibes my way. Have to find a private money lender in less than 2 weeks and get title company to close in that time frame as well. Nothing like a fire under your feet to get you to climb the rope!

from Indianapolis, Indiana

For those who have PM'ed and asked me, here are the documents that the bank has asked for, ON TOP OF the completed loan application:

-2012 and 2013 Tax Returns that are signed (?) by the borrower. (I will not have 2012 tax return due to me being in college, so this will require more paperwork)

-Proof of taxes and insurance and rental on current rental property. (This is all escrowed by the bank, so it will take some phone calls and e-mails to another bank in order to get them sufficient proof.)

-Letter of explanation detailing why my father is listed on my bank statements. (This was done when I was in high school in order to build credit...)

-Letter of explanation detailing why a $54.33 amount was placed into my account on a certain day, as it is not my traditional biweekly paycheck amount.

-6 months of reserves for both properties, and proof of such in my bank account

-Letter of explanation for what I plan to do with the current tenants, and how I plan to pay for them to leave, if I plan to do so.

Some of this stuff is reasonable, others...not so much. Just to give you guys an idea of what to expect. I will be able to update late next week when I get my appraisal back.

Investor from Valparaiso, Florida

replied over 4 years ago

Clay,

After reading the entire post I have to say I really hope this all works out for you. I can see you have invested both time and money into this deal and it seems like this is not only something you are determined to do but something that will benefit you greatly in the future.

I was wondering how long you are required to live in the home to qualify for the 203k loan. I thought it was a year but I am having trouble locating that answer at the moment. Also, does the year start once the renovations are complete and the property is occupied or can the clock start once you take possession of the property and that address becomes your mailing address and you are paying utilities?

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